PHOENIX - The proliferation of IO mortgage product and adjustable rate mortgages over the past year was fodder for a lively debate about the future performance of such innovations in the mortgage market. Investors at Information Management Network ABS West 2005 conference held here last week, had varied opinions about the severity of the situation, but on the whole, no one seemed overjoyed.

Alex Wei, vice president at Delaware Investment Advisors, was one of the more concerned panelists, pointing out that IOs routinely comprise 10% to 20% of deals, and sometimes more. Compounding the problem is the fact that IO FICO scores have been declining. As the number of purchase loans decreases, issuers need to fill the gaps with refinance loans, such as IOs and ARMs, exposing those deals to a much greater risk if and when interest rates go up and monthly payments adjust upward.

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